In Net Lease Mergers, Strength Begets Strength

Here are two basic rules of commercial real estate activity: Market conditions impact trends and trends change the markets. We are seeing such a give-and-take in the net lease space now, as we watch major players opt increasingly to build assets under management through the acquisition of companies with existing portfolios. 

We saw it earlier this year when Realty Income acquired VEREIT, creating a company with an enterprise value of $50 billion. The all-stock deal will pump Realty Income’s portfolio by $14.6 billion in real estate investments, including approximately 3,800 properties and 89.5 million square feet, according to the latter firm’s website. The Phoenix-based VEREIT, of course, is among the nation’s larger owner/operators of single-tenant properties in the US.

We saw it as well just this month when private investment group Blue Owl Capital picked up Oak Street Real Estate Capital in a cash-and-stock deal valued at $950 million. The Chicago-based Oak Street focuses on two primary strategies: structuring sale-leasebacks, which includes triple net leases, as well as “providing seed and strategic capital,” says Willkie Farr & Gallagher, which represented Oak Street in the deal. 

What we are seeing here is a case of strength begetting strength, savvy building on savvy. All four of these firms have proven track records of their own. Now they are building on that track record in one of the most solidly performing commercial real estate sectors. In terms of the net lease market, regular readers of this column know that we have tracked the steady trajectory of the sector through one of the most difficult periods in the history of real estate investing. 

Arranging Marriages

Let’s take a closer look at the Realty Income/VEREIT marriage: As Realty Income president and CEO Sumit Roy stated at the time of the deal, the merger would “generate immediate earnings accretion and value creation for Realty Income’s shareholders while enhancing our ability to execute on our ambitious growth initiatives.” He added that the deal would bring to stakeholders increased size, scale and—as a safeguard against further economic downturns—diversification. 

From our standpoint, one of the key phrases in that proclamation is “immediate earnings accretion.” In a super-hot market such as net lease, plagued as it is by a lack of available product (the end-result of too much capital chasing too few deals), these savvy players have found a quick and cost-effective path to ramping up their AUM as opposed to the alternative of building their portfolios of safe-haven investments one brick at a time. In the process of such rapid-fire aggregation, they also ramp up their future arbitrage opportunities. Strength once again building on strength. 

What is sewn in lean times reaps rewards in rich times. With these firms leading the way, we can expect to see more rapid ramp-ups of net lease AUM in the coming weeks and months, even as the economy continues its somewhat spotty road to recovery. 

Every acquisition refines and redefines the marketplace. 

Jonathan Hipp heads the U.S. Net Lease Group at Avison Young.